SV150: Companies set records for profitability and productivity

For Silicon Valley’s biggest public companies, 2016 was the most profitable and productive year ever, as firms responded to slowing sales growth with even slower hiring, according to the SV150, this newspaper’s annual ranking of Silicon Valley companies by revenue.

Investors seemed to respond favorably, driving the collective market cap up 20 percent — to $3.5 trillion — a level not reached since the height of the dot-com bubble 17 years ago.

“People are betting on their future and that explains why their valuations are so high,” said analyst Tim Bajarin of Creative Strategies. “Silicon Valley has its ups and downs, but it’s one of the most resourceful areas of the world, that continues to reinvent itself.”

Profits for the SV150 grew at a faster clip than sales, rising 6.8 percent to $142 billion. That helped to deliver record profitability of 16.7 percent, meaning the SV150 kept 16.7 cents for every dollar it sold, after taxes. That’s nearly twice the rate of the profit margin a decade ago.

The group’s top dog by far, Apple, played a new role last year as its sales and profits declined from the year before, uncharacteristically dragging the group’s overall performance down. Without Apple, the group’s growth rate in sales and profits would have more than doubled. Even so, the Cupertino tech giant still generated nearly a third of the group’s profits and a quarter of its sales — absent Apple, the profit margin for the remaining companies would have been reduced to 15.4 percent, short of the record.

Sales among the SV150 hit $849 billion, but grew at their slowest pace since 2009 — nearly 2 percent. Still, a larger proportion of SV150 companies grew sales in 2016 than the year before, while allowing hiring to barely simmer. On average, the SV150 collectively saw employment growth of less than 1 percent, compared to around 4 percent the previous two years. That led to record productivity, measured as sales per employee.

Not all companies followed the herd on hiring.

Facebook added 34 percent more workers, at a time when the firm racked up a massive 54 percent increase in sales and a whopping $5.8 billion hike in profit. Google’s parent firm Alphabet, with a $3.6 billion rise in profit and 20 percent increase in sales, boosted employment by 17 percent.

“If you’re being efficient, you’re being productive, you’re being profitable, and then you’re hiring,” said Tom Foremski a former Financial Times journalist who now blogs at Silicon Valley Watcher.

To Foremski, the firms notching high marks for productivity and profitability while not expanding headcounts — such as HP Enterprise, which shrank its workforce 19 percent — appear to be stagnating.

Moor Insights & Strategy analyst Patrick Moorhead attributed the low employment growth to a cycle in which valley firms invest for a time in adding jobs and boosting research and development, then let the money roll in.

“They’re focusing on profits,” Moorhead said.

The semiconductor industry also notched positive numbers, boosting its share of sales for the first time since 2012. A stunning performance by Santa Clara’s Nvidia, with a 38 percent increase in sales and profits that more than doubled even as it hired 12 percent more employees, pushed up the sector’s numbers as the firm leaped to dominance in processors for autonomous vehicles. Meanwhile, makers of machines that fabricate and service chips, such as Applied Materials and Lam Research in Fremont, have seen healthy sales gains.

“All of a sudden we have brand new markets developing that demand semiconductors, things like the Internet of Things, robotics, self-driving cars,” Bajarin said.

It’s not just more processors that are needed — burgeoning technologies require new types of semiconductors, such as the ultra-fast processors that have driven Nvidia’s sales for gaming, autonomous vehicles, mobile devices and computer vision.

And while the companies in enterprise technology recorded 19 percent profit growth, the consumer technology sector took a hit in 2016, with a 15 percent drop in profits. Fitbit, a manufacturer of wearable health trackers, suffered a $103 million loss, while action-video firm GoPro lost almost $420 million. One bright spot was TurboTax maker Intuit’s $969 million in profit, a 90 percent increase over 2015.

That bright spot is in striking contrast to Apple. In previous years, the hardware behemoth sold so much product it pulled the SV150 up. In 2015, the 150 firms together recorded sales growth near 7 percent, thanks to Apple’s 18 percent increase. And Apple’s 2015 profit growth of 20 percent yanked the combined bottom line for the other 149 firms out of negative territory and into a 4 percent hike.

Last year was a different story. Apple stumbled — its $45.2 billion in profit was a 16 percent drop and its $218.1 billion in sales was a 7 percent decline. The iPhone maker pulled the SV150 down to an anemic 2 percent sales growth, the weakest since just after the 2009 financial crisis. The last time the Cupertino tech giant saw a drop in both profit and sales was 15 years ago after the dot-com collapse.

Without Apple, the remaining 149 firms actually saw a collective jump in sales of 5.5 percent. Removing Apple from the profit picture also had a profound impact, with the rest of the SV150 racking up an increase of nearly 22 percent.

However, while Apple weighed down the SV150’s growth rate for both sales and profits in 2016, the company continued to maintain an above-average profit margin, keeping almost 21 cents for every dollar of sales, which was down from 23 cents the year before but still well above the group’s average.

The tech icon’s performance last year has drawn vastly different assessments of its future.

“I don’t think that there’s anybody that’s saying smartphone growth will be what it was some years ago,” said Gartner analyst Brian Blau. “Apple as we know has interest in other areas. They’ve been promoting, for example, healthcare aspects of their devices.

“They’re not done innovating. We will see some new and interesting products coming from them this year.”

But Steve Blank, Stanford adjunct professor and lecturer at the UC Berkeley Haas School of Business, after recalling the days when Steve Jobs ran Apple with “a vision, not a spreadsheet,” looked ahead to a grim future.

“Apple’s dead and just doesn’t know it,” Blank said. “We’ve passed peak iPhone. The company made a decision to abandon its customers and markets. This is what happens when you decide to milk the business and stop innovating.”